Office leases up in 1st half of the year

by J. Craig Anderson - Jul. 21, 2011 12:00 AMArizona Business Gazette

The amount of leased office space in the Phoenix area has expanded by almost 1 million square feet during the first six months of the year, according to a report last week by commercial-real-estate services firm CB Richard Ellis in Phoenix.

The increase has left some analysts scratching their heads, given that the Phoenix area did not add any new jobs during the same period.

"That's the thing that's puzzling: How are we absorbing this much office space without the jobs?" CB Richard Ellis Vice President Greg Mayer said.

One possibility is that a higher percentage of job losses have occurred among businesses located in smaller office buildings. CB Richard Ellis tracks leasing activity only among office properties with 10,000 square feet or more, and many of its competitors don't track office buildings containing less than 20,000 square feet.

While Mayer didn't know exactly how much of the Valley's office space was distributed among properties with less than 10,000 square feet, he said the amount was not insignificant.

"It's a lot," he said.

In the second quarter, the average asking price for office space in metro Phoenix declined for the fifth consecutive quarter, to $21.61 per square foot per year, the CB Richard Ellis report said.

But a significant decline in the vacancy rate among larger office properties has led to speculation that the market for leased office space may have bottomed out, Mayer said.

The office market's vacancy rate decreased slightly in the second quarter to 26 percent from 26.3 percent at the end of the first quarter, the report said, and vacancy among the most desirable, "Class A" buildings declined by 1.5 percentage points, from 24.3 percent to 22.8 percent.

Regionally, the downtown Phoenix and Scottsdale submarkets experienced the biggest increases in net leased office space in the first six months of the year, with the central Phoenix business district picking up more than 360,000 square feet of new leases, and the Scottsdale submarket leasing up an additional 288,000 square feet of office space.

At the other end of the spectrum, the two submarkets where office properties fared the worst during the first six months of the year were in the Desert Ridge/Paradise Valley submarket, where office owners lost a net 6,000 square feet of leased space, and the southeast Valley, which lost nearly 18,000 square feet.

There was little new construction of office space in the second quarter, Mayer said, with the only exceptions being a 273,780-square-foot building for the University of Phoenix at Fountainhead Corporate Park in Tempe and a 225,000-square-foot building in the Deer Valley area that will be occupied by the FBI.